2018 (8) TMI 2084 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - disallowance for the reason that no cogent evidence in support of appellant's claim of funds being acquired for business purpose were produced - assessee stated that as and when the assessee realized that nothing is being materialized on account of purchase of suitable land, he advanced this amount on interest to group concerns at the rate of 12% - HELD THAT - As AO has not disputed the genuineness of payment of interest receipt, interest on the loan borrowed and amount advanced. The only issue raised by the lower authorities is that the assessee has not taken these advances for business purposes. We find that once the AO has allowed part of interest for particular year, the genuineness is established. Secondly, even the purpose is also established. For this, the assessee has produced the resolution passed by Board of Directors of assessee company dated 26.092.2010, which clearly states that these loans secured or unsecured are for the purpose of the business. The copy of resolution was placed on record. Hence, the purpose is established. Even otherwise, we are of the view that the AO did not even dispute the upfront payment interest in the part of the year and once this is the position, the interest cannot be disallowed. We allow the claim of the assessee and this issue is accordingly allowed.

Summary

Issues:
- Disallowance of interest by AO and confirmation by CIT(A).
- Justification for disallowance of interest.
- Appeal against disallowance before Tribunal.

Analysis:
1. Disallowance of Interest by AO and Confirmation by CIT(A):
- The appellant's appeal arose from the CIT(A)'s order confirming the AO's disallowance of interest amounting to ?25,93,056. The appellant contended that the interest was related to business activities, while the authorities raised concerns regarding the lack of evidence supporting the claim that the funds were acquired for business purposes.

2. Justification for Disallowance of Interest:
- The AO disallowed the interest claim as the appellant failed to provide sufficient evidence to establish that the substantial interest-bearing advances were utilized for the real estate business. The CIT(A) upheld the disallowance, emphasizing the requirement under section 36(1)(iii) of the Income Tax Act for interest deduction only on capital borrowed for business purposes. The appellant's inability to justify the borrowing of funds solely for business led to the disallowance.

3. Appeal Against Disallowance Before Tribunal:
- The Tribunal heard arguments from both sides. The appellant, engaged in land development and construction, explained that the loans were intended for business purposes, supported by a resolution passed by the Board of Directors. The Tribunal noted that the AO did not dispute the genuineness of the interest payments or the purpose of the loans. Consequently, the Tribunal allowed the appellant's claim, stating that once the genuineness and purpose were established, the interest could not be disallowed. The Tribunal ruled in favor of the appellant, overturning the disallowance.

This comprehensive analysis outlines the key issues, the reasoning behind the disallowance of interest, and the subsequent successful appeal before the Tribunal.